REFORMING INSURANCE LAW: - Law Commission

developed has raised exactly the same issues, the former in relation to exclusion of remedies 189
and the latter in relation to the meaning of inducement. 190 Nevertheless, the Law Commission
proposed to retain the duty of disclosure: it rejected the arguments that it would not be possible
for insurers to ask the right questions, that higher premiums would result from the increased risk
of “sharp practice” and that self-regulation would be an appropriate substitute, but was swayed
decisively by the suggestion that in cases of temporary cover it would not be possible for insurers
to ask the right questions at the right time.
4.65 The proposals were not taken up. Subsequently, in November 2004, the New Zealand Law
Commission published a further report, Life Insurance, 191 which reaffirmed the principles set out
in the 1998 Report and sought to extend them to the life market. The Law Commission did,
however, recognise that there was some merit in the Australian approach and that it would be
useful to review the matter once the Australian Treasury had published its review of the 1984
Act. To that extent the proposals were provisional. In outline, the proposals emanating from the
Law Commission, which affected only non-disclosure and not misrepresentation, the latter being
governed by existing New Zealand legislation, were as follows.
(1) The duty of disclosure is to be retained, so that the assured must disclose material
facts.
(2) The test of materiality for non-disclosure is a hybrid of prudent assured and
prudent insurer, the test being that the assured knew, or in the circumstances a
reasonable person could have been expected to know, both the undisclosed fact
and that disclosure of the undisclosed fact would have influenced the judgment of
a prudent insurer in accepting the risk or the terms of such acceptance.
(3) The right to avoid a policy for non-disclosure or misrepresentation would be
limited to the following situations:
(a) fraud or recklessness on the part of the assured with respect to a material
fact;
(b) material non-disclosure in response to a specific question, irrespective of
the assured’s state of mind but as long as the materiality test is satisfied
(general questions are permitted, but any false answer to a general
question does not give rise to the right to avoid but only to a remedy under
(4) below);
(c) avoidance within 10 days, a provision designed to protect insurers unable
to make full inquiry at the outset;
(d) where the contract is one of reinsurance, on the basis that the parties to a
reinsurance agreement can protect themselves.
(4) In other cases the insurers are not entitled to avoid and are limited to damages and
to cancelling the policy prospectively or staying on risk while imposing new
premium and new terms.
(5) In the special case of misstatement of age, a provision equivalent to s 29 of the
Australian Insurance Contracts Act 1984 has been recommended.
189 HIH Casualty and General Insurance v Chase Manhattan Bank [2003] Lloyd’s Rep IR 230.
190 Drake Insurance Co v Provident Insurance Co [2004] Lloyd’s Rep IR 277.
191 Report 87.
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